Bitcoin’s back in town

The boosters point to not only the price spike – which could just be another speculative bubble – but evolution in the fundamentals of cryptocurrencies.

"Crypto-assets lack the key attributes of sovereign currencies and do not serve as a common means of payment.” -  Financial Stability Board

One notable step on the road to legitimacy was an announcement earlier this month that some big US retailers, including homewares chain Crate and Barrel, department store Nordstrom and Amazon-owned gourmet supermarket Whole Foods would accept Bitcoin and three other types of digital money.

That proposal links the cryptocurrencies to digital payments networks like Apple Pay and is backed by Flexa, a payments fintech, and Gemini, a Winklevoss-owned digital currency company.

Growing acceptance by mainstream merchants is a necessary condition for cryptocurrencies themselves to become mainstream but far from sufficient.

Growing base

The Financial Stability Board, created in the wake of the 2008 global financial crisis to monitor global financial systems, outlined the crucial factors at play in its October report from last year “Crypto-asset markets: Potential channels for future financial stability implications”.

The FSB’s assessment included consideration of the primary risks present in crypto-assets and their markets. These include low liquidity, the use of leverage and market risks from volatility and operational risks.

“Based on these features, crypto-assets lack the key attributes of sovereign currencies and do not serve as a common means of payment, a stable store of value, or a mainstream unit of account,” the FSB concluded.

So what’s changed?

On the acceptance front, certainly cryptocurrencies are again growing their merchant base.

Apart from those mentioned above, Microsoft, Overstock, Wikipedia and Lowes are working on acceptance.

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As a proxy for wider adoption, scams involving cryptocurrencies are also surging again.

According to the UK’s Financial Conduct Authority (FCA), scams involving cryptocurrencies such as bitcoin and foreign currency trading have tripled in a more than £27 million. That confirms more widespread usage.

(Notably, the FCA follows the practice of many regulators in not even categorising cryptos as currencies, preferring instead the more accurate and banal “exchange tokens”.)

This growth is significant but the total numbers of crypto transactions  in the context of global payments remains miniscule.

As far as being a store of value - another criterion from the FSB - cryptocurrencies are not.

As the Reserve Bank of Australia says: “Cryptocurrencies have no legislated or intrinsic value; they are simply worth what people are willing to pay for them in the market. This is in contrast to national currencies, which get part of their value from being legislated as legal tender.”

While supporters of cryptocurrencies might use the Mandy-Rice Davies argument of “well he would say that wouldn’t he?” given a stated desire of cryptocurrencies is to circumvent the traditional payments system, history tells us revolutions in the financial system are amalgamated into the mainstream as soon as they reach a scale to have systemic impacts.

It’s the Catch-22: regulators and policy makers let revolutionaries prosper until the revolution gains enough followers at which time it is forced into the existing state.

No initial vowel

That doesn’t mean cryptocurrencies will disappear. The architecture has some major attractions, including the potential to limit fraud with the payment (as opposed to scams which occur between the participants, not in the transfer.)

So we are seeing Facebook, for example, explore a new currency via Libra Networks. This reportedly will be a “stablecoin” designed to facilitate exchange between official fiat currencies and cryptos.

Meanwhile, many more major institutions and government agencies are looking at the distributed ledger technology which supports most cryptocurrencies for wider uses. In a recent development, some major global banks are investigating a digital cash system.

UBS is the major proponent of the "utility settlement coin" which aims to utilise such a ledger, a blockchain, to make clearing and settlement in financial markets more efficient.

As befits most new fintechs ventures, the project has a nonsensical, marketing-generated moniker - Fnality (no initial vowel).

Reuters reported the utility settlement coin would consist of a digital cash instrument that banks could use to settle transactions.

“The coin would be a digital cash equivalent of central bank-backed currencies like the dollar or euro that would run on blockchain-based technology,” Reuters said.

Other groups of banks are also experimenting digital currencies and tokens - albeit not cryptocurrencies in the bitcoin sense.

Not featuring

What is salient however is the absence of cryptocurrencies from most of the myriad existential discussions of the future of banking.

For example, the FSB’s new report on FinTech and market structure in financial services: “Market developments and potential financial stability implications” mentions “crypto” only once - and that in a footnote.

A new report from global consultants Celent, “Innovation in Banking and Payments 2019”, runs through the key trends in the field while looking at a model bank of the future, cryptocurrencies don’t feature.

Innovation will focus on open banking, customer experience, mobile and digital channels, the cloud and artificial intelligence. Of course cryptocurrencies might feature if, for example, they enhance customer experience and become more efficient in digital banking.

But it is difficult to contemplate that happening without crypto gaining far-wider legitimacy with regulators.

The always entertaining CB Insights will no doubt have a perspective on crypto but in the meantime it’s a reminder on getting too excited is apposite:

“Hi there, for all you public company executives, please note that artificial intelligence mentions have overtaken mentions of blockchain on quarterly earnings calls. Please adjust your corporate strategy accordingly.”

Andrew Cornell is managing editor of bluenotes